Medical Savings Accounts: The Critical Factor in Health Care Debate
Harris, Jennifer, Markoe, Jeannine, Government Finance Review
During the spring and summer of 1996, much of the congressional debate on the health care reform package centered on medical savings accounts (MSAs). Proponents view MSAs as a viable option to reduce national health care costs. Opponents contend that while national costs for healthy individuals would fall with MSAs, costs for the remainder of the population would increase. While under the new law (PL104-191) MSAs will be available to a limited group of people, policy makers will continue to debate the benefits of MSAs as they consider future health care reform initiatives. After describing the extent of federal and state MSA proposals, this article provides an overview of the MSA debate.
Under an MSA program, an account is established for each employee, similar to an individual retirement account (IRA). The employee and employer are allowed to make regular, tax-free contributions to the account. Generally, MSAs are established in conjunction with a high-deductible, or catastrophic, health coverage plan - referred to in this article as an MSA/catastrophic option. Under this option, the employee would use the MSA to pay for medical expenses incurred until the deductible in the catastrophic health plan is reached. At the end of the year, any unused MSA funds remain in the account for the employee to pay the next year's medical expenses.
The congressional debate on MSAs was largely along party lines. On one side, Republicans wanted to allow all employers to offer an MSA/catastrophic option to their workers. Alternatively, Democrats believed that the MSA/catastrophic option would be used only by healthy, more affluent individuals and would increase the overall cost of health care for the remainder of the population.
State legislatures also have had considerable activity regarding MSAs. Eighteen states have MSA legislation on the books, and three states joined the ranks in the summer of 1996 - Louisiana, Wisconsin, and Ohio. According to a comparative analysis by the Council for Affordable Health Insurance, many of the state laws allow the employers to establish an MSA account, provide tax relief by reducing gross income for contributions made to the MSA by the employer or the employee, and sometimes exempt interest accrued on the account. Some state laws allow individual MSAs to be established by state residents, while a few state laws allow both individual MSAs and MSAs through employers.
While the goal of the MSA-coverage strategy is to contain health costs, there is considerable controversy over the impact of such arrangements on employee benefit plans, insurance markets, and managed care providers.
Argument for MSAs
The MSA concept has generated considerable interest in 1996. Supporters of MSAs contend that combining MSAs with a catastrophic health insurance plan 1) has the potential to provide sufficiently powerful incentives for covered individuals to play a more active role in making responsible decisions on how their medical dollars are spent, 2) may reduce the overall national costs of health insurance, and 3) has been a popular choice among employees when employers offer an MSA/catastrophic option in addition to a traditional health insurance option.
Removal of Third-party Payment System. Many MSA proponents believe that one of the major factors driving up health care costs is the third-party payment system that has insulated consumers from the cost of their health care decisions. Because third parties - private insurance companies or the government through Medicare and Medicaid - pay doctor and hospital bills for patients, patients lack the market incentives to control costs, avoid unnecessary care or tests, or shop for the best-priced care. Accordingly, doctors and hospitals are nor chosen on the basis of cost-effectiveness but on how they maximize quality. The MSA/catastrophic coverage option would remove the third-party payer and, therefore, prompt individuals to be more discriminating and effective consumers of health care. …